This post is part of our Complete Guide to Washington's Capital Gains Tax.
Note: This post discusses Washington's capital gains tax, with rates of 7% and 9.9% (RCW 82.87) and how its charitable deduction rules compare to those under the separate 9.9% income tax enacted under ESSB 6346 (effective 2028).
Washington’s capital gains tax includes a charitable deduction.
At first glance, it looks familiar—another way to reduce taxable gains through philanthropy.
But there is a critical limitation that many people miss:
Not all charitable donations count.
The Rule
Under RCW 82.87.080, taxpayers may claim a deduction for charitable donations—but only if the donation is made to a “qualified organization.”
A "qualified organization" must meet two requirements: it must be eligible to receive a charitable contribution under IRC §170(c), and it must be principally directed and managed within the state of Washington.
This matters most with donor-advised funds: in Washington, the relevant organization is the DAF sponsor (Fidelity/Vanguard/Schwab, etc.), not the charity you ultimately recommend.
The statute further explains that this means the place where the organization’s activities are:
“primarily directed, controlled, and coordinated.”
That language is doing a lot of work—and it creates real uncertainty. The Washington DOR has published administrative rules and guidance under WAC 458-20-301 that address what "principally directed and managed" means in practice, but gray areas remain—particularly for organizations with hybrid or distributed governance structures. If there is any doubt about whether a specific organization qualifies, the safest path is to consult a Washington tax advisor before the donation is made, not after.
What This Actually Means
For federal purposes, confirm that the recipient qualifies under §170(c) and that the gift satisfies the applicable deduction requirements.
Washington adds a separate requirement: the recipient must be principally directed and managed within Washington.
That can be straightforward in some cases:
- A Seattle-based nonprofit → likely qualifies
- A local Washington charity with in-state leadership → likely qualifies
But it gets much less clear with:
- National nonprofits with operations in multiple states
- Organizations with distributed or remote leadership
- Donor-advised fund sponsors based outside Washington
Where People Get This Wrong
1. Donor-Advised Funds (DAFs)
This is the biggest trap.
Many high earners use donor-advised funds sponsored by large national organizations.
The issue:
- The relevant entity is the DAF sponsor, not the ultimate grant recipient
- If the sponsor is not “principally directed and managed” in Washington, the deduction may not apply
In other words:
You can donate to a Washington charity through an out-of-state DAF—and still lose the Washington deduction.
2. National Charities
Large, well-known nonprofits often operate nationwide.
Even if they have a meaningful presence in Washington:
- That does not necessarily mean they are principally directed and managed here
The statutory test is about where control happens, not where services are delivered.
3. Federal Assumptions
Many taxpayers assume:
“If it’s deductible federally, it should work for Washington.”
That assumption does not hold here.
Washington has effectively created a state-specific filter on top of the federal system.
The Planning Implications
This rule turns what looks like a simple deduction into a structural planning issue.
1. Choice of Giving Vehicle Matters
- Direct gifts to Washington-based organizations → more likely to qualify
- National DAFs → potentially disqualified
- Private foundations → depends on governance and location
2. The Deduction Is Already Limited
Even if you qualify:
- The deduction only applies to charitable donations above a floor — a $250,000 statutory baseline (RCW 82.87.080, a separate provision but equal to the standard deduction each year), inflation-adjusted by the DOR to $278,000 for tax year 2025
- It is capped — a $100,000 statutory baseline, indexed to $111,000 for 2025
To put those two limits together (2025 figures): you deduct only the donations that exceed $278,000, and the deduction is capped at $111,000—so you reach the full deduction only once your giving hits $389,000 ($278,000 + $111,000). A donation below $278,000 produces no deduction at all. So if you have $500,000 in capital gains and donate $389,000 to a qualifying Washington-based charity, your deduction is $111,000—shrinking your taxable gains by that amount. That deduction saves you $7,770 in Washington State capital gains tax (at the 7% rate). Lose the deduction entirely because you gave through an out-of-state DAF, and you leave $7,770 on the table.
That makes it even more important not to lose it through technical mistakes.
3. This Is a Policy Choice
The structure suggests a broader point:
Washington is not just encouraging charitable giving—it is encouraging charitable giving tied to Washington-based organizations.
That is unusual compared to federal tax policy.
What About Washington's New Income Tax?
Starting in 2028, a separate 9.9% income tax on high earners takes effect under ESSB 6346. The income tax also includes a charitable deduction—but it is structured differently from the capital gains tax deduction.
Under the income tax (ESSB 6346, Sec. 309), the charitable deduction is the amount the taxpayer claimed under section 170 of the federal internal revenue code for gifts to a qualified organization—up to $100,000. Here is the part that is easy to get wrong: Section 309(2) defines “qualified organization” to have “the same meaning as in RCW 82.87.080.” That means the income tax carries the very same “principally directed and managed in Washington” requirement as the capital gains tax. Apply the direction-and-management test to the actual recipient, including the sponsoring organization for a DAF contribution. National reach or an out-of-state label alone does not determine eligibility. The Washington-nexus catch applies to both taxes.
So the contrast is not about Washington nexus—both taxes require it. A gift to Fidelity Charitable, whose sponsor is not Washington-based, is disallowed under both. The real differences are structural: the capital gains deduction has a high floor ($278,000 for 2025) before any deduction is allowed, then an indexed cap ($111,000 for 2025). The income-tax deduction has no separate Washington giving floor, but it depends on the qualifying amount claimed under federal §170, including applicable federal limits. The $100,000 state cap is shared by spouses and registered domestic partners. For a gift to a qualifying Washington organization, $100,000 of deduction is worth $9,900 against the 9.9% income tax, or $7,000 against the capital gains tax at the 7% rate ($9,900 if the gain sits in the 9.9% tier above $1 million).
The practical implication for post-2028 planning: a founder with both capital gains and ordinary income should route charitable gifts through a Washington-nexus vehicle to protect either deduction. A Washington-based DAF or a direct gift to a qualifying local nonprofit can support deductions under both taxes. A DAF contribution does not qualify for either deduction if its sponsoring organization fails the Washington direction-and-management requirement. A $100,000 gift alone produces no Washington capital-gains charitable deduction because it falls below the annual giving floor. Any income-tax deduction beginning in 2028 must be calculated separately under §309.
Bottom Line
The charitable deduction under Washington’s capital gains tax is not automatic.
To qualify:
- The organization must be principally directed and managed in Washington
- Common planning tools—especially national donor-advised funds—may not qualify
- Federal deductibility does not guarantee state deductibility
For high earners and founders planning liquidity events, this is a detail worth getting right.
Before making the gift:
- Verify that the recipient meets the applicable qualification requirements.
- Calculate the deduction separately under each Washington tax.
- Retain records supporting the contribution and deduction.
Because in Washington:
Not all charitable donations are treated the same.
Planning a sale with a charitable component? book a 20-minute call with Joe Wallin or email wallin@carneylaw.com.
